August 22, 2016

The Consumer Financial Protection Bureau (CFPB) issued its final rule amending the mortgage servicing rules under Regulations X and Z. The proposal for these amendments was issued in November 2014. The amended provisions cover a wide range of topics, including the following:

Tailored periodic statements and early intervention notices for borrowers in bankruptcy;

Additional procedures for communicating with, and confirming, a wide variety of potential successors in interest;

Application of loss mitigation procedures and foreclosure protections more than once over the life of the loan;

An additional notice required upon completion of a loss mitigation application;

Clarification of how certain requirements apply in the context of a servicing transfer; and

Relief from the periodic statement requirement for certain charged-off loans.

Most of the provisions will go into effect 12 months after publication in the Federal Register. However, the amended provisions relating to successors in interest and periodic statements for borrowers in bankruptcy will take effect 18 months after publication.

Also of note, the CFPB issued an accompanying interpretive rule concerning the interaction of the Fair Debt Collection Practices Act (FDCPA) and the servicing rules. Characterized as an advisory opinion for purposes of the FDCPA, the interpretive rule aims to provide a safe harbor frShow Editorom FDCPA liability for compliance with the following requirements under Regulation X:

The requirement to communicate with a potential successor in interest regarding an existing loan (i.e., communicating with a third party regarding a debt);

The requirement to send early intervention notices despite a borrower’s cease communication request pursuant to the FDCPA; and

The requirement to respond to borrower-initiated communications regarding loss mitigation, despite a borrower’s cease communication request pursuant to the FDCPA.

The Ballard Spahr Mortgage Banking Group continues to review this voluminous offering from the CFPB (more than 900 pages), and will have further comments in the near future. In addition, a webinar covering this final rule and other recent servicing developments is scheduled for Tuesday, September 13, 2016.

The Government Accountability Office (GAO) has issued a report on the Consumer Financial Protection Bureau's (CFPB) use of Small Business Regulatory Enforcement Fairness Act (SBREFA) panels in its rulemaking process. The report, "Observations from Small Business Review Panels," addresses the extent to which the CFPB solicited, considered, and incorporated small entity inputs into rulemakings, and the views of small entity representatives (SER) on the rulemaking process.

The GAO looked at the CFPB’s rulemaking process and documents in the four final rulemakings for which the CFPB convened SBREFA panels, all of which were mortgage-related—TILA/RESPA integrated disclosure rule, mortgage servicing rule, mortgage loan originator compensation rule, and HMDA. (The CFPB has also convened SBREFA panels in connection with its proposed arbitration and payday lending rules, and will soon be convening a SBREFA panel in connection with its debt collection rulemaking.)

The GAO contacted all of the 69 SERs who participated on the SBREFA panels for the four final rulemakings and completed interviews with 57 SERs. (Six SERs declined to be interviewed and six SERs were unavailable for interviews.) In addition to the GAO’s specific findings, the report provides a detailed step-by-step description of the SBREFA process in the background section.

The report’s key findings include the following:

The SBREFA process requires the panel to complete its report within 60 days after the panel is "convened." The CFPB defines "convened" to mean the date on which the panel is formally established by the CFPB, SBA, and OMB rather than the date of the panel meeting with the SERs. According to the report, in the earlier panels, the CFPB convened the panels shortly before or concurrently with providing SERs with materials. The SERs then had from 10 to 11 business days to review the materials before panel meetings. For the HMDA panel (the most recent panel reviewed by GAO), the CFPB provided SERs with materials 13 business days before convening the panel and held the panel meeting five business days after convening the panel, thereby giving SERs 18 business days to review the materials before the panel meeting. The CFPB also gave SERs time after the panel meetings to provide comments, with such additional time ranging from five to 10 business days.

Thirteen of the 57 SERs stated that they felt the CFPB treated the process as a formality and seven SERs felt the process was hindered by the CFPB’s lack of knowledge of the industry. For example, one SER stated that "CFPB staff did not have enough practical experience and during the panel meeting there was limited time to talk about the actual rule because the [SER] had to explain certain banking processes to CFPB."

Twelve SERs stated that they needed more time to prepare for the panel.

Ten SERs stated that the CFPB’s pre-meeting outreach could be improved by having the CFPB obtain more knowledge of industry practices before convening the panels. For example, one SER "believed CFPB was surprised by answers [SERs] provided to their questions because the agency lacked real world experience; the [SER] suggested CFPB do site visits with typical small entities to become better informed."

While 38 of the 57 SERs stated the CFPB had selected participants who represented their respective industries, most SERs on the mortgage loan originator compensation panel did not believe their industry was well represented.

Seventeen SERs stated that they believed the CFPB considered their views in its rulemaking, 19 stated the CFPB partially considered their views, and 15 stated the CFPB did not consider their views. (Six said they did not know.)

Seven SERs stated that they were satisfied with the CFPB’s final rules, 26 stated they were not satisfied, and 23 stated they were partially satisfied. (One stated he or she did not know.)

The dissatisfaction of the SERs with the CFPB’s final rules suggests the CFPB is not giving sufficient weight to SERs’ input and is deserving of the criticism it received from SERs that the CFPB "treated the process as a formality." According to the report, one of the SERs who expressed that criticism "said CFPB was good at following processes but felt it did not listen to input. He added that he felt CFPB’s mind was made up before the panel took place."

The Consumer Financial Protection Bureau (CFPB) has published a notice in the Federal Register announcing that it has revised its methodology statement for calculating the average prime offer rates (APORs) under Regulations C and Z.

Regulation C requires covered financial institutions to report, for certain transactions, the difference between a loan’s annual percentage rate (APR) and the APOR for a comparable transaction. Under Regulation Z, a creditor may be subject to certain special provisions if the difference between a loan’s APR and the APOR for a comparable transaction exceeds certain thresholds.

The CFPB calculates APORs on a weekly basis according to a publicly available methodology statement. The CFPB has revised the statement to reflect a change in the source of survey data for the one-year variable rate mortgage product that it uses to calculate the weekly APORs. The change was made because Freddie Mac has discontinued publishing the one-year variable rate mortgage data used by the CFPB. Beginning on July 7, 2016, the CFPB started using data provided by HSH Associates for the one-year variable rate mortgage product. It continues to use data provided by Freddie Mac for other products in calculating the weekly APORs.

In a Request for Information (RFI) posted on the Federal Business Opportunity website last month, the Consumer Financial Protection Bureau (CFPB) solicited information from vendors so it can "better understand current, state-of-the-art capabilities and strategies to aid its consideration on whether to propose a registration system for nonbank financial institutions."

Pursuant to Dodd-Frank Section 1022, the CFPB is authorized to "prescribe rules regarding registration requirements applicable to a covered person, other than an insured depository institution, insured credit union, or related person." The CFPB stated in its Fall 2015 and Spring 2016 rulemaking agendas that in addition to considering "larger participant" rules for consumer installment loans and vehicle title loans, it was "also considering whether rules to require registration of these or other non-depository lenders would facilitate supervision." In the RFI, the CFPB stated that should it propose a registration rule, "it would provide notice and an opportunity for comment pursuant to the Administrative Procedure Act" and "would issue a final rule only after giving careful consideration to all comments."

In the RFI, the CFPB stated that it is considering "whether to procure a comprehensive and interactive online web-based Registration System that would allow nonbank financial institutions supervised or regulated by the CFPB to apply for, amend, update, or renew registration online using a single set of uniform applications and would allow the CFPB to process these registration applications and amendments through automated workflows." The CFPB further stated that such a system "might also be used to collect financial and operational data as well as organizational structure data. The registration information collected might include business register data such as the name, address, aliases, industry, and ownership information. The system might also be used to integrate data with other regulatory data."

To "determine the availability and cost associated with" an automated online registration system that would meet the CFPB’s potential requirements (which are described in the RFI), the CFPB asked vendors interested in providing related services to provide information regarding their capabilities, past performance, and costs for a system and system support. The CFPB also asked vendors to provide any comments or suggestions related to the CFPB’s potential requirements. Responses to the RFI were due by July 29, 2016.

At the American Association of Residential Mortgage Regulators Annual Conference last week in Tampa, Bill Mathews, President of State Regulatory Registry LLC (SRR), announced that SRR had responded to the RFI. (SRR is the entity that owns and operates the Nationwide Multistate Licensing System & Registry (NMLS).) The NMLS (which uses a uniform application and allows licensees to amend, update and renew licenses online) is the system of record for non-depository, financial services licensing or registration for more than 60 state or territorial governmental agencies. It is the sole system of record for mortgage companies for 58 state agencies, the sole system of record for individual mortgage loan originators for 59 state and territorial agencies, and the sole system of record for the registration of depositories, subsidiaries of depositories, and mortgage loan originators under Regulation G. Currently, more than half of the states manage additional license types in the money services business, debt and consumer finance industries, with new states and new license types being added fairly regularly.

Given that NMLS is already the system of record for so many state agencies, it would be very surprising if the CFPB elected to use a different vendor, particularly as SRR is in the midst of designing and then launching NMLS 2.0, which will purportedly address some of the limitations under the current version of NMLS and provide for even more automation and functionality.

The Consumer Financial Protection Bureau (CFPB) published for comment proposed substantive and organizational changes to the Regulation Z Commentary regarding the calculation of the annual exemption threshold amount for the special appraisal requirements for higher-priced mortgage loans under section 129H of the Truth in Lending Act (TILA). Both the Office of Comptroller of Currency and the Federal Reserve Board have proposed corresponding proposed rules. Comments must be received on or before September 6, 2016.

When originally adopted by the CFPB in 2014, the final rule for appraisals in connection with higher-priced mortgage loans exempted, among other loan types, transactions of $25,000 or less. The final rule also required that the $25,000 amount be adjusted annually based on any annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

Among other changes, the proposed rule would bifurcate the calculation of the annual exemption threshold amount into actual and baseline threshold amounts. The actual threshold amount would be the exemption amount for the upcoming year and could not be less than the prior year’s actual threshold amount. The baseline threshold amount would be used to calculate the actual threshold amount for a year following a year in which the actual threshold amount was not adjusted because the previous year’s CPI-W would have caused a decrease in the actual threshold amount.

The New Jersey Supreme Court recently clarified its rules regarding mortgage priority, holding that a factoring company’s secured first mortgage can be trumped by a law firm’s later-filed mortgage where the factoring company knew of the law firm’s mortgage but continued to make discretionary loans to the borrower. Though the court recognized that other states’ laws would preclude this result, it nevertheless held that New Jersey common law and statute required this outcome under the circumstances.

In Rosenthal & Rosenthal, Inc. v. Benun, the plaintiff factoring company entered into factoring agreements for two business entities, both personally guaranteed by the daughter of the principal of the two business entities (the Guarantor) and secured by two successive real property mortgages in Monmouth County. The mortgages contained an anti-subordination clause as well as a “dragnet clause” requiring that the mortgages would not only secure the personal guaranty but would also secure “all obligations and indebtedness of every kind” that the Guarantor incurred to the factoring company in the future.

In March 2007, the Guarantor executed a third mortgage on the Monmouth County property in favor of a law firm for $1.679 million in unpaid legal fees for her father and his business entities. The plaintiff factoring company had notice of the third mortgage, but continued to make discretionary advances to the father’s business entities. Ultimately, the business entities went bankrupt and the Guarantor defaulted on her personal guaranty, leaving $4 million in obligations to the factoring company and $3 million in unpaid legal fees. The total indebtedness was far in excess of the value of the real property securing the debts.

The plaintiff factoring company moved to foreclose on the Guarantor’s real property, arguing that its mortgages had priority over the law firm mortgage. The trial court granted the factoring company’s motion for summary judgment on the priority issue, but the appellate court reversed.

Affirming the appellate court's reversal, the Supreme Court held that under New Jersey law, the priority of an advance mortgage depends on whether the obligations secured by the mortgage are discretionary or mandatory and whether the lender in the primary position has actual knowledge of the later-executed mortgage. Where, as here, the advances made by the factoring company were discretionary and the factoring company had actual notice of the later-executed mortgage, all discretionary advances made after receiving notice became subordinate to the later-executed mortgage.

The Supreme Court explained that the rule has its foundation in New Jersey common law. The rule was also supported by state statute. The court recognized that several other states had modified their mortgage laws to foreclose the possibility of subordination. The court also recognized that a contrary rule would eliminate “any ambiguity and foster uniformity of interpretation and application.” The court concluded that any change to New Jersey's scheme “is best addressed to the Legislature.”

Companies with New Jersey factoring agreements containing anti-subrogation clauses should review those agreements to determine whether advances under the agreements are discretionary, and, if so, should establish procedures for ceasing advances upon the filing of a lien or mortgage on property securing the factoring obligations.

NMLS Updates

NMLS Release 2016.1.4 is targeted for August 22, 2016, and contains system enhancements, such as outdated browser warnings, MCR delete all function, and updated role management for surety companies in Electronic Surety Bonds (ESB). A summary of the complete changes can be found here.

NMLS users must upgrade browsers to support TLS 1.2 by October 8, 2016. Otherwise, their browsers will be restricted from accessing NMLS.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.